Reimbursement of Health Insurance Expenses Beyond COBRA Period

[401 Chaos]

I understand that final 409A regulations generally exempt payment / reimbursement of health insurance premiums on behalf of former employees for up to the COBRA period. What if employer with self-insured plan wants to provide coverage for up to 2 years as part of severance benefit?

Can you provide for reimbursement of COBRA premiums paid by ex-executive for up to 18 months to get around the 105(h) discrimination issue but then also provide for reimbursement (or possibly even direct payment of) premiums for ex-executives coverage under a fully insured individual health insurance policy for the remaining 6 months.

Seems reimbursing under an individual policy rather than the self-insured group plan for the last 6 months should take care of any discriminatory concerns under 105(h) and should also arguably be exempt from 409A as that remaining 6 months would be nontaxable benefits to the former employee under applicable IRS guidance that provides for a broad definition of the term "employee" under 105 and 106 extending to include former / terminated employees. Since 409A seemingly exempts unlimited payment / reimbursement of nontaxable benefits, the last 6 months of payments should also be exempt from 409A. In short, the entire 24 months of continued health coverage payments would be exempt from 409A--the first 18 months exempt under the general reimbursement for COBRA period rule and the last 6 months exempt under the exception for non-taxable amounts.

I suppose in some (perhaps many) cases it may be cheaper to cover individuals under an individual policy from the start rather than under COBRA. Seems allowing for reimbursement of either COBRA premiums or premiums for substantially similar individual policy for first 18 months should also be fine so long as it is clear that reimbursement after the COBRA period must be limited to coverage outside of the self-insured group plan / COBRA.

Any thougths?

[Don Levit]

401 Chaos:

I have not read the 409A regs.

I am curious, though, if it says anything about medical benefits that extend past COBRA?

For example, if you look at PLR9834037, it states, ""The Committee report for DEFRA allows a plan to be considered a welfare benefit plan if it is a continuation of a plan maintained currently or in the past for active employees. The benefits provided by the 501©(9) Trust are a continuation of the medical plan for active employees.

The fact that the 501©(9) Trust only provides benefits to retirees, does not cause the deduction limits of section 404 to apply rather than the deduction limits of sections 419 and 419A.

In other words, wouldn't the medical plan for retirees not be considered deferred comp?

Don Levit

[401 Chaos]

Don,

Thanks for your response. I have excerpted below the portion of the preamble summarizing this aspect of the final regulations which do specifically tie into COBRA.

I am not that familiar with your PLR and the situation we are looking at involves a terminated employee rather than a retiree per se but I think the same general concept applies. There are other PLRs (sorry do not have cite handy right now) that basically notes that former employees will continue to be treated as employees for 105 purposes. I guess there is some concern to my mind though where the individual policy to be provided / reimbursed is essentially a new policy and not simply continuation of the same benefits / plan that was (is) provided to active employees.

6. Reimbursement and Fringe Benefit

Plans

a. In General

The proposed regulations provided

that certain plans under which a service

recipient reimburses certain types of

expenses (for example, reasonable

moving expenses or reasonable

outplacement expenses directly related

to a termination of the service provider’s

services) actually incurred by a service

provider (including certain in-kind

benefits provided to the service

provider) following a separation from

service are not nonqualified deferred

compensation plans for purposes of

section 409A, if such reimbursements

are available only for expenses incurred,

and the reimbursements are made

during a limited period (generally not

after the second taxable year of the

service provider following the

separation from service).

In response to questions from

commentators, the final regulations

clarify that a right to a benefit that is

excludible from income will not be

treated as a deferral of compensation for

purposes of section 409A. Accordingly,

for example, an arrangement to provide

health coverage excludible from income

under section 105 generally would not

be subject to section 409A.

Many commentators requested

increased flexibility to provide for

reimbursement arrangements upon a

separation from service, including

certain requests to exempt broad

categories of such arrangements, such as

the continuation of any plan in which

the service provider participated while

performing services. The Treasury

Department and the IRS believe that an

exemption from coverage under section

409A is not appropriate in such

circumstances, because such plans may

provide for rights to significant amounts

of deferred compensation over lengthy

periods of time. However, the final

regulations extend the limited period

during which taxable reimbursements of

medical expenses may be provided, to

cover the period during which the

service provider would be entitled (or

would, but for such arrangement, be

entitled) to continuation coverage under

a group health plan of the service

recipient under section 4980B (COBRA)

if the service provider elected such

coverage and paid the applicable

premiums. In addition, the final

regulations contain several provisions

governing reimbursement plans

(including plans providing in-kind

benefits) that constitute nonqualified

deferred compensation plans for

purposes of section 409A, so that

taxpayers will be able to design such

arrangements to comply with the

payment timing requirements of section

409A. For a discussion of these

provisions, see section VII.B.2 of this

preamble.